ACH & Risk: What You Should Know

By: Jenn Redlich

April 8, 2020

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Let’s start with a hypothetical:

Imagine being tired of the inefficient processes, expensive fees or outdated methods involved in payments. You want to move money in a more cost effective way and need a partner to improve your payment processes.

Naturally, the first place you look is Dwolla (smart thinking). What you’re needing is help understanding the risks associated with ACH payments and how you can protect your business from users with bad intentions. It is important to have awareness of what ACH is, how ACH transfers are processed, what can happen when there are returns and how you can best attempt to prevent them.

While Dwolla does not provide fraud, risk or specific monitoring protection services directly, we can provide general guidance based on our experience in the industry. Dwolla also has various partners that may be able to provide you with such support.

As a reminder, these are tips, suggestions and best practices that we are sharing based on our experiences within the payments field. This is not legal advice. Every company is different and has its own unique needs and obligations to prevent fraud. However, every company should be aware of how fraud can occur, and the importance of proper customer onboarding.

What are ACH Payments?

First, it is important to understand that there are two types of ACH payments. ACH credits push funds into an account, as with direct deposit from an employer to a bank account. ACH debits are when funds are pulled from an account, such as a consumer making loan payments from a bank account.

Whenever money is moving within your business, there are some general risks to be aware of. While the rate of fraud is relatively low for ACH payments, there is always a risk of bad actors whenever money is moving.

ACH Returns can be issued for various reasons such as insufficient funds, invalid account information and stopped payments, to name a few. An option with various account verification companies is to have balance and name checks in place to better ensure funds are available and that your user is actually authorized on the bank account they have linked.

Have a Fraud Monitoring Plan

As Benjamin Franklin supposedly said, “An ounce of prevention is worth a pound of cure.”

Businesses that offer the ability to move money should strongly consider implementing processes and procedures to help prevent and mitigate returns. A high-level understanding of your users and how theyare transacting will help in detecting unusual activity. Some businesses are able to manually review all account activity for each of their users, but that may not be an option for your business or may become unruly as you scale. Many businesses will either build monitoring software and reporting or use a third-party that provides this type of service.

Monitoring software and reporting can be tailored based on criteria such as frequency of transactions, dollar amounts and IP addresses, but these are only some of the options to consider. Again, knowing who your users are and how they normally transact will help you be aware of inconsistencies that may identify risky behavior and allow you to put a stop to that behavior before it potentially causes you a loss from a return.

Make it Hard for Bad Actors (and Easy for Good Ones)

You want to be successful in deterring bad actors from using your platform or services maliciously. We have found that businesses often find success by adding friction with additional steps in the onboarding process. This is not meant to create a bad user experience, but instead can give you peace-of-mind that you are better protecting your business and your money.

Consider incorporating steps such as two-factor authentication, email verification or requesting additional documentation to support user identity verification. More information can be better when it comes to protecting your business. Further, there are potential regulatory issues if you are not compliant, so don’t be afraid to ask for more information when appropriate. Additional identifying information includes a driver’s license, employer pay stub or business document—whatever makes sense for your business and industry.

Returns do not discriminate and can happen to anyone in any business. Be aware that returns are a part of any type of payment including credit cards, debit cards, paper checks and ACH. It benefits your business to be proactive instead of reactive. Find the tools that best fit your business needs, but avoid doing nothing. Dwolla’s intent is to support our clients in their business growth and, as mentioned, have partners that specialize in the protection of your business, too.

Dwolla, Inc. is an agent of Veridian Credit Union and all funds associated with your account in our network are held in one or more pooled accounts at Veridian Credit Union. These funds may not be eligible for share insurance by the National Credit Union Share Insurance Fund. Dwolla, Inc. is the operator of a software platform that communicates user instructions for funds transfers to Veridian Credit Union.